Conflating Income and Wealth in Tax Reform

Reader comment on: Mayor Bloomberg Gets One Right

Submitted by Eugene Patrick Devany (United States), Oct 1, 2013 10:26

"The Times article makes the common mistake of conflating income and assets, or failing to distinguish between the two."

Income, sales and net wealth are separate tax bases. Our tax code currently exempts wealth and redistributes $1.3 trillion in tax expenditures (credits, deductions, special rates, exemptions and deferrals) primarily to high earners. Over time this shifts wealth so that the top 10% of the population now have 75% of the net wealth while the bottom half of the population have gradually lost 70% of their net wealth since 1995. The bottom share amounts to 1% of the net wealth for 50% of the people. A wealth gap this large was last seen 80 years ago just before the Great Depression.

The author correctly notes that, "most ... people got that way because somewhere along the line they ... worked hard and created something of value, and that they should be entitled to the fruits of their labor." The tax code, including the 16% payroll taxes, have consistently taken most of the value from the laborers and given it to the investors and business owners. The per capita net wealth of the bottom half has been reduced to about $3,000. These people work very hard for minimum wages to the point where the U.S. now has the largest percentage of basic low paying jobs of any developed country (24.8%).

Tax reform should focus on restoring the wealth of the poor and lower middle class without overtaxing the high earners. This can be done by permitting a tax on net wealth as an option.

[Wonkish] An "optional" net wealth tax is a fair way to tax individuals based upon ability to pay. A 2% tax on average net wealth (excluding $15,000 cash and $500,000 retirement funds) combined with a flat 8% income tax (and no job killing payroll taxes) would be reasonable for more than 95% of the population. [The poorer half of the population would pay just 8% on wages while avoiding 16% in combined payroll taxes]. An optional 26% income tax rate (plus deferred capital taxes on gains, gifts and estates) could be elected by anyone who wants to avoid a net wealth tax.

For businesses taxed as C corporations, the income tax rate could also be lowered to 8% with a small 4% VAT. The VAT would offset the revenue now collected by the higher income tax rates and the business portion of the payroll taxes - negating any change in consumer prices.

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Title By Date
⇒ Conflating Income and Wealth in Tax Reform [414 words]Eugene Patrick DevanyOct 1, 2013 10:26
The logic of progressive taxation... [35 words]DavidSep 30, 2013 15:45

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